PMIs Strong, But It’s Too Early to Celebrate

A rise in euro-zone business activity in January, the first in five months, is the latest in a recent string of more upbeat data for the troubled region. But it’s too soon to say whether it’s happy days again.

Most obviously, the debt crisis — Europe’s single biggest economic burden, and a huge weight on the minds of consumers and governments alike — is far from over. Until it is, the possibility of another “Lehman moment” — for example, the ejection of Greece from the euro zone and resulting financial chaos — means slight improvements in data now could easily be rendered irrelevant at a stroke.

Second, the better tone in the PMI data is limited to the “core” coutries of Germany and France, Markit said; business output in the rest of the bloc is still contracting.

Third, austerity measures by governments seeking to end the crisis will continue to dent activity, as businesses suffer from a lack of spending and consumers feel the pinch from reduced benefits and higher taxes. With governments and households spending less, it’s hard to see businesses continuing to expand.

In fact there are signs of this in the PMIs. New orders taken by businesses fell for the sixth straight month, meaning their prospects for future output aren’t great. Knowing this, they reduced job numbers for the first time since early 2010.

Unemployment has hit a series of record highs in the euro zone in recent months and going by this evidence, it probably isn’t done yet. Rising joblessness will add to governments’ welfare bills and cut their tax take, making it harder to get their finances in order.

Relative to dismal expectations, the PMIs are certainly strong, and may well mean the euro zone escapes recession in the coming months. As Nomura economist Stella Wang said: “These tentative signs suggest that economic disaster may be avoided in the first quarter.”